Wednesday, September 5, 2012

Record Labor Day gas prices won't last

NEW YORK (CNNMoney) -- Gas pricesare higherthan they've been going into any other Labor Day weekend on record, but experts predict some relief at the pump is coming fairly soon.
According to AAA, the national average price of regular gas jumped 9.4% in August -- the biggest percentage gain in more than three years.

According to Tom Kloza, chief analyst at the Oil Price Information Service, many factors combined to send prices steadily higher in August. Among them were issues at a number of refineries -- such as a fire at a major Chevron (CVX, Fortune 500) facility in Richmond, Calif. on Aug. 6, and the shutdown of a significant share of the nation's refinery capacity in advance of Hurricane Isaac over the last week.
It wasn'tjust refinery issues lifting pump prices, though. Global issues helped to lift oil futures about 7% over the last month. Worries about the European sovereign debt crisis began to ease. Expectations that the Federal Reserve was preparing to provide more economic stimulusgrew, while worries about Iran's nuclear program -- and the strict sanctions imposed on the oil-rich nation -- flared up again. Related: Isaac gas price spike reaches to Ohio

But Kloza said a number of factors are likely to lower gas prices fairly soon. The damage from Hurricane Isaac is not believed to be serious, which should allow Gulf Coast refineries to get back to work quickly. The end of the summer blend of gasoline on Sept. 15 could bring prices down 20 cents a gallon over the next month or so. And Kloza believes concerns about Europe could again start to hit oil prices globally in the coming weeks.
"I think that $3.25 a gallon for gasoline for the last month of the year is achievable," Kloza said. Related: Rules to double U.S. fuel economy to 54.5 mpg
Indeed, the AAA national average dropped Saturday by two-tenths of a cent to just under $3.83 -- the first decline in nine days. The price has remain unchanged for the past two days.
Still, that price beat the previous record of $3.67 heading into the 2008 Labor Day weekend. That summer, oil and gas hit their highest prices of all time. But prices plunged later, due to the meltdown in financial markets that followed the Lehman Brothers bankruptcy.

Who Can I Blame for High Gas Prices?

When high gas prices fuel driver ire, everyone looks for someone to blame.
Earlier this year, President Barack Obama pointed his finger at a popular scapegoat: oil traders. "We can't afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage and driving prices higher only to flip the oil for a quick profit," he said in a White House briefing.
So what does affect oil prices?Oil speculators?
Oil refining makes up more than two-thirds the cost of a gallon of gas. And investors can affect oil prices when they buy oil futures contracts to protect themselves from price inflation or to simply trade them for profit.
Even though oil prices and the amount of oil speculation are related, they make up a small part of oil markets -- 6.6%, according to a 2011 Congressional Research Service report on hedge fund speculation and oil prices.Global supply and demand?
Contrary to what some commentators and sitting presidents say, the laws of supply and demand reign supreme in oil markets.
Worldwide net demand for oil (consumption minus supply) has zigzagged over the past two decades (see graph), but the general trend has been an increase in consumption.
However, today there is a situation of rising prices and falling net demand -- and here's why. "There (are) a couple of things going on -- Libya/Arab Spring geopolitical concerns, Iran beginning the latest round of saber-rattling and cutting into supply cushions again," says Jason Stevens, director of energy equity research at the investment research firm Morningstar.
In other words, political instability in oil-rich nations can hamper oil supply. As a result, OPEC's spare capacity fell by about 1 million barrels per day from 2009 to 2011, resulting in rising prices.
Gasoline prices also spike when major oil refineries are hit by a force of nature. In fall 2005, when Hurricane Katrina shut down many Gulf Coast refineries, prices for regular octane gasoline shot up from $2.10 to almost $3.10 for a short time.Taxes and regulations to blame?
How about lowering taxes and lifting regulations on the oil industry? American Petroleum Institute spokesman Carlton Carroll says that would help. "I can't say exactly how much reducing regulations would reduce the price that consumers pay at the pump, but yes, reduced regulations generally mean lower costs," he said in an email.
Stevens says he believes the U.S. and state governments can do something to directly lower gasoline prices. "Gasoline prices could see a reduction if government taxes and regulations changed, as federal and state taxes make up (around) 10% of pump prices," he says.Cheaper dollar, pricier oil?
Back in the days of disco and big hair, oil and greenbacks were barely related. Nowadays, the U.S. dollar and the price of oil move, on average, in almost reverse lock step.
The chart below with data from the Energy Information Administration and Federal Reserve shows change in the dollar's strength versus the change in oil prices since 2000. Since 1990, the two have become more closely connected. When the dollar loses strength, oil prices usually climb.
But why might currency strength affect oil prices?
"Oil is sold on world markets in terms of dollars," says Mark Thornton, a senior scholar at the Ludwig von Mises Institute in Auburn, Ala.
"That means that other countries have to sell their currency and buy dollars before they can buy oil," Thornton wrote in an email. "This supports the value of the dollar. It also means that if the dollar weakens, it takes more dollars to purchase a unit of oil."
Since the 2007-09 recession, the dollar's strength index and oil prices generally have moved in opposite directions.
"When the dollar is weaker, foreign currencies are stronger, by definition. That means people in other countries can buy more oil for the same amount of money," Kristin Forbes told U.S. News & World Report in 2008. Forbes is an associate professor at the Massachusetts Institute of Technology and a former member of the White House's Council of Economic Advisers from 2003 to 2005.
If foreigners can buy more dollars for less of their currency, they can buy more oil, which means increased oil demand. That means higher oil prices and higher gas prices in the U.S.Use the Strategic Petroleum Reserve?
In America, there are few options to instantly produce more oil.
Last summer, during the revolutions in oil-rich Libya and Egypt, the federal government released more than 30 million barrels of oil from the U.S. Strategic Petroleum Reserve, or SPR, where the government stores oil in case supplies run low.
From May to September 2011, oil fell from $101.33 to $85.61 per barrel, according to the EIA. Average gas prices at the pump dropped from $3.93 to $3.61 per gallon during the period, then to $3.28 by December.
What if the government tapped the strategic reserve again? Stevens says that would lower oil prices, at least for a while. "(But) every time we release barrels, we have to refill the SPR at a later date, usually at higher prices than we receive for the sales. Better to keep the SPR in reserve for true supply emergencies," he says.What all this means
The bottom line: Those to blame for high gas prices are anyone who taxes gasoline, buys oil, buys stuff containing oil, and/or increases the supply of dollars relative to other commodities and currencies.